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Overview Of

Malaysian Taxation
Tax is a contribution levied on persons,
property or business for the support of
government.
[Oxford Dictionary]

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The government needs taxes to fund government development
and social expenditure.
Taxes are to be collected efficiently and at minimum cost to
government and to taxpayers.
Taxes can be used as a fiscal tool to maintain the desired level
of employment and increase economic development and
growth.
Taxes are used as policy measures to encourage activities
beneficial to the country (for example investments that create
jobs) and to discourage those which are not (for example
smoking and consuming alcohol).

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Principles of taxation (Adam Smith, 1776)
Adam Smith was a political economist and the author of "The Wealth of
Nations. Principles of taxation established by him are:
Equitable and fair tax burden
Minimal economic distortion
Low compliance cost to Inland Revenue Board (IRB) and taxpayers

Simplicity and certainty


Flexibility to provide adequate revenue to Government

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Administration of tax in Malaysia is the responsibility of the
Ministry of Finance.
It is done through the Inland Revenue Board of Malaysia.
The responsibility of managing direct taxation lies with the
Director General of the Inland Revenue (DGIR).
The responsibility of managing indirect taxation lies with the
Director General of Royal Malaysian Customs Department.

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Formal sources of law
(i) Statute law or legislation
(ii) Case law (precedents and authority set by
previous court rulings)
Informal sources of law
Practices of the Inland Revenue Board
- Subsidiary legislation (Example, statutory
orders)
- Public Rulings

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Direct taxes Indirect taxes
Income tax (including Customs duties (comprises of
corporate tax) import duties and export
duties)
Petroleum income tax Excise duty

Stamp duty Goods and Services tax


replaced sales tax and service
tax from 1 April 2015.

Real property gains tax

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Self-assessment system (SAS) was implemented on
companies from year of assessment 2001 and on
individuals and other taxpayers from YA 2004.
Under the SAS, taxpayers determine their taxable income,
compute tax liability and submit tax returns.
Notice of assessment would not be issued under SAS.
The tax return furnished by the taxpayer is deemed to be
the notice of assessment.

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Resident individual taxpayers
Graduated scale of rates from 0% (on the first RM5,000) to
a maximum of 28% (for income exceeding RM1,000,000).
In year of assessment 2016, the tax rates for the two
highest bands were increased from 25% to 26% and 28%
for chargeable income bands between RM600,000 to
RM1,000,000 and exceeding RM1,000,000.
Non-resident individual taxpayer
Flat rate of 28% with no personal reliefs (28% from YA
2016)

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Companies
Paid-up capital RM2.5 million (Small and Medium Companies)
- 19% on the 1st RM500,000 chargeable income (reduced to18%
from YA 2017)
- 24% on the subsequent chargeable income exceeding
RM500,000 ( 24% from YA 2016)
Paid-up capital > RM2.5 million
- Fixed rate of 24% onwards( 24% from YA 2016)

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Discount on Corporate tax rate if there is an increase
in Chargeable income
Companies that achieve an increase in chargeable income from the
preceding year are entitled for discount in income tax rates as stated
below:
1% reduction in tax rate where if the increase in chargeable income is
5% but <10%.
2% reduction in tax rate where if the increase in chargeable income is
10% but <15%.
3% reduction in tax rate where if the increase in chargeable income is
15% but <20%.
4% reduction in tax rate where if the increase in chargeable income is
>20%.
The tax rate reduction applies only for chargeable income in excess of the
preceding year.

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The discount given to income rates is applicable to:
(i) Company with paid-up capital of more than RM2.5 million or a
Limited Liability Partnership (LLP) with total capital contribution of
more than RM2.5 million.
(ii) Company with paid-up capital of up to RM2.5 million (SMEs) or a
LLP with total capital contribution of up to RM2.5 million on the
chargeable income exceeding RM500,000.
(iii) Trust body.
(iv) Executor of an estate of an individual who was domiciled outside
Malaysia at the time of his death and receiver appointed by the
court.

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Example:
A company that has chargeable income of RM2.1 million for YA
2016 and RM2.3 million for YA 2017 pays income tax for YA 2017
as follows:
RM
First RM2.1 million of chargeable income: RM2.1 million x 24% = 504,000
Excess RM200,000 at 1% discount : RM200,000 X 23% = 46,000
Total tax for YA2017 = 550,000

This reduction in tax for increase in chargeable income applies for


years of assessment 2017 and 2018.

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Income tax shall be charged for each year of assessment (YA) upon
the income of any person:
accruing in or derived from Malaysia; or
received in Malaysia from outside Malaysia.
This is the territorial scope of taxation. However, para 28 Schedule 6
exempts the income of any person derived from sources outside
Malaysia and received in Malaysia. However, resident companies in
the business of banking, insurance, sea or air transport are taxed on
world income basis.

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Section 4 of the Income Tax Act 1967 (as amended) [ITA]:
Tax is chargeable under the ITA on income in respect of:
(a) Gains or Profits from a Business;
(b) Gains or Profits from an Employment;
(c) Dividends, Interest or Discounts;
(d) Rents, Royalties or Premium;
(e) Pensions, Annuities or other periodical receipts;
(f) Gains or Profits not falling under any of the above.

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According to sec 5 ITA, chargeable income" of a person is
ascertained in 6 stages:
(i) Determine the Basis Period for each source of income
(ii) Compute Gross Income from each source
(ii) Compute Adjusted Income by deducting allowable expenses
(iv) Compute Statutory Income by deducting capital allowances
from adjusted income
(v) Compute the Aggregate Income by deducting brought forward
business losses
(vi) Chargeable Income

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Federal Court
Court of Appeal
High Court
Sessions Court
Magistrates Court

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The Director General of Inland Revenue
Special Commissioners of Income Tax
High Court
Federal Court

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